Are we in another economic crisis?
Over the last 75 years voters have learned that government might can be brought to bear on almost any economic problem and it gets be solved. Think of the recessions of the 1980s and 1990s. Think of the Great Depression. (Even though it has been proven that government intervention actually prolonged the Great Depression; people think that the government actually reduced it.)
As a result, voters have grown to expect that government can create a relatively riskless society. When things get bad people get scared, government steps in and everything becomes okay. There is a catch however. There is a price to a riskless society. Society is not inherently riskless. Having a special daddy that steps in when times are bad and takes away risk can be a costly affair.
The devil in the details is that in every emergency the government grows in size and stays larger than it was before. It typically stepped in and borrowed other people's money, applied the fix, and worried about the bill and its increased size of the economic total later. Eventually however the cost of doing this accumulates to the point where the bill cannot be paid. That time is visible on the horizon.
We are finding out the limits to the cycle. Eventually, government grows to the point where it will have difficulty making its interest payments. How do we know we are fast approaching it? On one hand there's common sense. On the other hand there are credit rating agencies like Standard & Poor's who offer opinions to investors when common sense has been exceeded. They run the numbers and tell us whether we are safe or out at the plate. We are rounding third base now. First base was it getting its share from taxes. Second base was it borrowing what it thought it should have. Third base is when it borrows to meet its interest payments. S&P and the markets are telling us that it is well down the road to reaching its limit.
Has our government finally run out of other people's money?
This is not something that just appeared last Friday. Financial analysts saw this coming months ago if not years ago. S&P had warned that it was likely coming if the debt ceiling bill lacked meaningful spending cuts. The market reaction is likely program trading not based upon fundamentals, but on trading tactics. I do not think we are in another financial crisis. We are just extending the previous one. Stay conservative.
Regards,
Chris Gerber, CFA
As always, if you have any questions or would like to talk please feel free to call our office at 952-230-1340. I look forward to hearing from you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
